Has the falling knife that is Life Partners Holdings (NASDAQ:LPHI) hit the floor yet? Well, maybe... From over 16 last December the stock dropped like a stone to below 3.5 in June. Its still bouncing: Up 18% last week. Down 16% early this week. Last time I checked it was trading a little below 4.
A lot of fingers, hands, and maybe other investor body parts litter the floor.
Life Partners buys life insurance policies, at a discount, from well to do seniors. The company then sells shares in the policies to investors promising a high yield which is independent of stock and bond market fluctuations. The company profits from transactional fees and commissions.
Investors collect death benefits when the original owners die -- not the way most people like to make money -- but that's the way the business works.
Profiting from death may seem somewhat macabre. Yet the undertaking, casket, and cemetery businesses do the same. Everyone except the deceased and their relatives are happy.
Life Partners, like all insurance companies, tries to project a respectable, stable, well established image. Their website explains ...
[The company is] one of the oldest and most active companies in the United States engaged in the secondary market for life insurance known generally as “life settlements.” . . . since its incorporation , it has facilitated over 127,000 transactions associated with the purchase of more than 6,400 policies totaling over $2.8 Billion in face value.
The company calls its products "Life Settlements." Other --not so polite -- commentators say "death bonds."
Up until early 2011 Life Partners prospered. The stock quintupled from January 2007 to January 2009. By January 2011 the price was stil over 15.
Even now financial stats seem very attractive ...
- Current P/E: 2.53, Forward P/E: 2.48
- No debt
- 50% insider ownership (and they haven't sold.)
- Price/cash ratio: 2.13
- Several Law Firms investigations -- see here and here.
- SEC Notices -- see here
- NASDAQ filing irregularities -- see here
- Delayed Annual report -- see here
- Auditors resigned --see here
What is going on? Financial stats scream “bargain”... yet stock price plummets.
You see the same pattern in Chinese Reverse Merger stocks. See here, here, and here for three examples -- there are many others. Well, Life Partners is based in Texas, not Beijing, but financial irregularities are no respecters of geographical boundaries.
When fraud claims start swirling, auditors resign, and law firms start suing, you don't have to be an investment guru to see red flags.
Has Life Partners hit bottom? Well, I surely don't know. I do know, however, the Chinese Reverse Mergers never seem to hit bottom. I would steer clear.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.